Are Seasonal Businesses Sustainable?

There’s a widespread myth that half of all companies fail in their first year of business. The truth, according to the Small Business Administration, is thathalf make it to the five-year mark — and the longer a business’s doors stay open, the less likely they are to ever close.

But another myth persists: Seasonal businesses suffer most of all. SBA’s data doesn’t bear this out, showing companies across varied industries tend to follow similar patterns in terms of failure. Manufacturing-based businesses, for example, are no more protected from failure than seasonally driven businesses like restaurants and retail stores, meaning other factors determine companies’ likelihood of long-term success.

That doesn’t mean, however, that there aren’t real risks inherent in seasonal businesses. An Ohio State University study indicated that60 percent of restaurants don’t make it past the first year. Another 2005 study amended that, saying that the 60 percent figure applied to the first three years. The likely reason? Restaurants have a hard time getting startup loans from banks, putting these businesses in a catch-22: They’re taking a big risk without sufficient funds, but they aren’t able to obtain funding because they’re seen as too risky.

Here’s what seasonal businesses striving for sustainability need to keep in mind.

The money coming in has to last all year.

Much like teachers’ salaries, seasonal businesses that endure peaks and valleys have to spread their income across an entire year. A landscaping business flush with cash through the spring and summer months has to weigh that against the relatively barren fall and winter months. With CB Insights finding that29 percent of small business failures can be attributed to cash flow problems, it’s imperative that seasonal business owners find ways to “spread the wealth.”

Kabbage, an online lending platform,recommends two ways to do this: by diversifying a small business’s income streams and getting cash flow management help. Diversifying income streams is a smart move, bringing money in during the off season and creating a bulwark against industrywide slumps. Tax preparation accountants, for example, can take on payroll work the remainder of the year; lawn care companies can add snow removal to their list of services. As Kabbage warns, however, businesses need to test their second revenue arm out before committing to it to ensure they don’t overextend themselves or invest in an area without market demand.

Cash flow can be hard to sustain, particularly when seasonal businesses struggle to obtain loans or lines of credit from traditional lenders. But having a backup plan — i.e., credit — available is essential to a seasonal business’s survival. Alternative financial institutions, such as online lenders, often have lower thresholds for young businesses to meet, enabling them to gain access to short-term or replenishing credit without having been in business for a decade or making millions in cash each year. Kabbage, for example, ties its line of credit to a small business’s live data, allowing the company to adjust lines of credit in real time to match a business’s seasonal needs.

Forecasting business expenses is a necessity.

Seasonal businesses not only have ups and downs in terms of sales and revenue, but also in terms of expenses. Because these companies have specific busy seasons and demands, they also have specific periods when they’re preparing for an influx of business — that translates to money spent on inventory, staffing, and more.

The problem, of course, is that these pre-season prep periods coincide with the slowest times in terms of revenue, meaning the business’s coffers may be looking a bit empty. Forecasting expenses so the company has already anticipated these early costs and accounted for them can ensure the business doesn’t run out of money right before sales come rolling in. Plan Projections, a company helping small businesses manage financial projections, explains how seasonal businesses can forecast expenses usingheadcount, fixed expenses, and other drivers.

Because the elements behind the forecasting are often known, seasonal business owners can look at ways to trim costs in these areas to increase their margins early. For example, if they need part-time administrative help, it may make sense to outsource this to a virtual assistant to reduce overhead costs. Leasing equipment, rather than buying it, may also make sense to eliminate costs — especially for repairs and maintenance — during the off season.

Sustainability is created at the worst of times.

While no business wants to imagine the worst happening — a natural disaster, a break-in, health crises — seasonal businesses are particularly vulnerable to disasters. FEMA reports that40 percent of businesses aren’t even able to reopen after a disaster. Other, seemingly smaller issues can also create circumstances that snowball into long-term issues for a seasonal business, from a hole in the roof to rust-hampered lawnmowers. These unanticipated costs can add up quickly and drain the planned budget for the year.

That means a seasonal business’s budget has to be drafted with these contingencies in mind, as well as an emergency fund. Most business finance managers recommend having three months’ worth of business expenses set aside for an emergency fund, with one month’s worth being the absolute minimum. This gives a seasonal business a cushion to figure out how to execute Plan B, as would a line of credit. This emergency fund should have strict criteria to establish its use so it doesn’t become another discretionary fund.

Contingencies should comprise a line item in a seasonal business’s budget of up to 30 percent of its total expenses. Contingency budgets address the unexpected costs that crop up throughout a year that aren’t immediately traumatic for a company — that’s what an emergency fund is for — but can quickly dilute its margins if leaders aren’t careful. These can include everything from inflation to an increase in the price of lumber after a hurricane. Any money left over in this particular fund can be rolled to the next year and applied to growth initiatives or used to keep the business cash flow-positive.

Seasonal businesses can find a path to sustainability, but business owners have to remember that a tightened window for making money means fail-safes have to be put in place. While some, like banks, may see seasonal businesses as risky, the risks they absorb can often be calculated — making it easier for them to make it to the other side of the five-year mark.

Serenity Gibbons is a former assistant editor at The Wall Street Journal. The local unit lead for the NAACP in Northern California and a consultant helping to build diverse workforces, Serenity enjoys gathering insights from people who are creating better workplaces and maki...